Pace shares fall 40% after profit warning

Shares in Pace fell almost 40 per cent after the set-top box manufacturer dented its credibility with investors by warning that market expectations for its profits should be scaled back after “a disappointing start to the financial year”.

The FTSE 250 company blamed lower margins in Europe and supply-chain problems following the disaster in Japan for the setback, which it forecast would reduce full-year operating profit to $150-$170m (£97m-£110m) – up to $50m lower than it had previously expected.

Pace, which last year overtook Motorola and France’s Technicolor to become the world’s biggest maker of television set-top boxes by shipments, forecast that its first-half operating margins would be squeezed to about 5.5 per cent – down from the 8 per cent that management had previously expected.

It said that this partly reflected inventory building to ensure that Pace could “deliver on customer orders within a tight supply-chain environment”. However, it predicted that margins would recover to 8 per cent in the second half.

Neil Gaydon, chief executive, said: “It is clear from today’s statement that despite revenues and product shipments being on track, we have made a disappointing start to the financial year with our profitability. We have taken action and are making changes to improve our second-half performance and beyond.”

However, there was strong criticism from some analysts who follow the company.

Analysts at Altium Securities said: “Pace now faces an uphill task in rebuilding confidence and we believe needs a refresh of the leadership team.”

Jonathan Imlah, an analyst at Collins Stewart, added that calls from some investors for a change of management would “inevitably increase in volume”.

However, Ian Robertson, an analyst at Seymour Pierce, said that the market’s strong negative response to the statement was owing in part to a widespread failure by investors to appreciate the turbulent nature of the hardware market. Forward visibility was more difficult than in the software market, which is more reliant on recurrent sales, he said.

Pace shares suffered a single-day fall of 20 per cent in March after it revealed an order deferral by a large customer in conference call. The deferral had not been revealed in the annual results statement released on the same day. Such communications mistakes had encouraged a perception of management as “over-confident”, Mr Robertson said. But he praised Mr Gaydon for having turned Pace into a “far better business” since his appointment in 2006.

Analysts expected Pace to maintain its market share, and saidit would not suffer significantly in the next few years from internet-based TV, which was still far from gaining dominance in the mass market.

The stock closed 39.18 per cent down, extending its losses over the past year to 44.8 per cent.

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